POWr Social Media Icons

Wednesday, December 3, 2014

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article.

Every country tapping the global sovereign bond market details the dangers investors face in its prospectus, often in a boilerplate section enumerating possible problems – such as fiscal deficits or taxation issues – that is largely ignored.

But the document sent by Ethiopia to international investors ahead of its foray into the global sovereign bond market is somewhat different. Far from a boilerplate, it includes a list of unfamiliar hazards, such as famine, political tension and war.

There is also the risk of famine, the “high level of poverty” and strained public finances, as well as the possible, if unlikely, blocking of the country’s only access to the sea through neighbouring Djibouti should relations between the two countries sour.The document, seen by the Financial Times, is a sobering reminder of the risk of investing in one of Africa’s less developed nations. With gross domestic product per capita at less than $550 per year, Ethiopia is the poorest country yet to issue global bonds.

In the 108-page prospectus, issued ahead of its expected $1bn bond, Ethiopia tells investors they need to consider the potential resumption of the Eritrea-Ethiopia war, which ended in 2000, although it “does not anticipate future conflict”.

Addis Ababa, Ethiopia’s capital, also warns that it is ranked close to the bottom of the UN Human Development Index – 173rd out of 187 nations – and cautions about the possibility of political turmoil. “The next general election is due to take place in May 2015 and while the government expects these elections to be peaceful, there is a risk that political tension and unrest . . . may occur.”

But the long list of risks is not deterring investors, as ultra-low interest rates in the US, the UK, eurozone and Japan push sovereign wealth funds and pension funds into riskier countries in search of higher-yielding bonds.

Instead, some investors are focusing on the danger of a currency crisis. Addis Ababa has devalued its currency, the birr, twice over the past five years – by 23.7 per cent in 2010 and 16.5 per cent in 2011 – in an effort to win export competitiveness. Since then, the Ethiopian central bank has managed to slow the currency’s depreciation by intervening regularly in the market.

Addis Ababa has now told potential investors that “it may not be possible for the National Bank of Ethiopia to manage the exchange rate as effectively in the future as it has in the past” because of reduced hard currency reserves.

The country has reserves to cover only 2.2 months’ worth of imports – almost half the 4.3 months it had in 2010-11. “Failure to manage a steadily depreciating exchange rate may adversely affect Ethiopia’s economy . . . [and its] ability to perform obligations under” the bonds, it says.

The prospectus also reveals for the first time details of Ethiopia’s heavy dependence on Chinese loans to finance its infrastructure investment. Credit lines from China and Chinese entities accounted for 42 per cent of all external loan disbursements in 2013-14, and for 69 per cent in 2012-13.

“China has emerged as a key development partner,” the prospectus says, “often providing sizeable financing tied to infrastructure projects undertaken by Chinese firms.” Among those, telecoms groups ZTE and Huawei and a company the prospectus names as China Electric Power have lent Ethiopia more than $2bn over the past few years.

Lazard, the investment bank advising Addis Ababa on financial matters, declined to comment. The Ethiopian government did not respond to a request for comment. Investors said the bond was expected to price later this week at between 6 and 7 per cent.

Copyright The Financial Times Limited 2014. You may share using our article tools.Please don't cut articles from FT.com and redistribute by email or post to the web.

Sidama

Follow by Email

About Worancha ወራንቻ

Worancha blog is a private media outlet. Its major objective is playing significant roles in minimizing the gap of information flow in the Sidama country. Accordingly, it has been gathering, organizing, analyzing and disseminating credible, accurate and balanced news and news genres. Besides, it has been contributing an immense role in peace building, democratization and sustainable economic development in Sidama.